Local traders ready to switch if China loses its 'favored' status.

The most-favored nation trading status of the People's Republic of China, one of the Los Angeles Basin's fastest-growing trading partners, is facing its biggest threat in years.

Chinese officials are sweating over whether or not their U.S. trading status will be renewed after its expiration in 1993, local trade experts confirmed, especially since President-elect Clinton appears more willing than President Bush to take a hard line with China on arms proliferation, human rights and other issues.

But Los Angeles area trade officials said they aren't losing a wink of sleep over the uncertain fate of China's trading status, even though that country ships huge quantities of apparel and toys through local ports.

Los Angeles is not dependent on China for T-shirts, teddy bears or anything else, said Barry Powell, a lawyer specializing in customs and international trade with the L.A. law firm Grunfeld, Desiderio, Lebowitz & Silverman.

"They import technology," he said. "What they have is tremendously low-cost production."

China is currently the largest source of U.S. textile and apparel imports, accounting for 14 percent of the U.S. total, according to trade figures.

Any trade restrictions put on Chinese products might cause a slight increase in the prices of certain items and could disrupt some local companies' routines, said trade experts. But retailers would easily find other places to buy these goods, they added.

"The global marketplace would adjust in five seconds," said Bob Bartlett, a retail management consultant based in San Francisco. "We've proven that you can drop a prefabricated building in a rice paddy and turn out apparel and semiconductors."

He said local companies would merely turn from South China to the Philippines or some other low-cost economy to buy their merchandise.

Powell credited China on its price and quality of goods but said, given enough time, his clients could source production elsewhere.

"Mexico is already a significant threat to the Orient," he noted.

Ever since the June 1989 Tian An Men Square tragedy, there's been a growing movement in Congress to punish China through trade restrictions. Many in Congress want to take away China's "most-favored nation" trading status.

Most-favored nation status, which is the standard trading status the United States has with all but a handful of countries, allows relatively low tariff rates for goods exported to the United States.

Without such status, tariffs on Chinese products would average more than 60 percent of an item's value, making them unable to compete in the U.S. market.

Currently, dolls made in China carry a 12 percent tariff, and most clothes have a 6 percent tariff.

Under terms of the Jackson-Vanik Amendment, China's MFN status is subject to renewal every year.

President Bush, a former envoy to China, made clear his belief that any moves to humiliate China with trade sanctions would thwart that country's move toward a free-market economy.

The Bush administration extended China's MFN status until 1993, even though congressional members were opposed to the extension.

President-elect Clinton, however, appears more flexible in taking a hard line against China, although congressional debate on revoking China's MFN status could be delayed until mid-1994.

The Journal of Commerce reported Nov. 25 that Clinton transition officials are considering a measure to avert a foreign policy disaster with China. They hope to accomplish that through a plan, to be enacted in June, requiring Chinese officials to meet a number of conditions on human rights, arms proliferation and trade reform.

Clinton could threaten to revoke MFN status if China does not meet these requirements, the Journal of Commerce reported.

In addition, Sino-American relations suffered a major setback earlier this month when U.S. intelligence reports were made public that China had recently exported dangerous missiles to Pakistan after promising the Bush Administration it wouldn't.

Chinese officials are nervously awaiting the actions of a Clinton regime because foreign trade has been fueling much of that country's growth.

China's trade volume with the U.S. -- imports and exports combined -- has grown from $82.7 billion in 1987 to $136.5 billion in 1991, according to figures from the U.S. Department of Commerce. That represents a 65 percent increase, most of which took place in exports to the U.S.

China exported $6.3 billion worth of goods into L.A. in 1991, but only imported $1.2 billion from the L.A. area, according to figures supplied by the Los Angeles County Economic Development Corp.

With $7.5 billion in two-way trade, China now ranks as L.A.'s fourth-largest trading partner. In 1988, just four years ago, China was only L.A.'s eighth-largest trading partner, with $3 billion in two-way trade.

Many L.A. companies have already developed contingency plans for doing business if sanctions are imposed on China.

Mattel Inc., the El Segundo-based toy manufacturer, has two plants in China that produce Barbie dolls. But the company also has two manufacturing plants in Malaysia and two in Mexico, said Glenn Bozarth, Mattel's vice president of corporate communications.

"Obviously, we've known about the situation in China for some time and have had contingency plans," he said. "We're able to ship goods elsewhere and manufacture elsewhere."

But those contingency plans do not necessarily mean shutting down Mattel's plants in China. Bozarth said half of Mattel's sales are transacted outside the United States. So, if sanctions are imposed on China, the company could ship its Chinese-made dolls to Europe and import dolls to the United States from its other plants.

Barbara Fields, whose L.A.-based buying office represents retailers such as Jay Jacob, Target, Mervyn's, Sears and Nordstrom, said more and more stores are turning to manufacturers in Mexico, Canada and the United States anyway because they need a quicker turnaround for merchandise.

Steven Nichols, president of K-Swiss Inc., the Pacoima-based manufacturer of athletic shoes, said revoking China's most-favored-nation status would have little direct effect on his company. But such a move would likely result in a price increase for all athletic shoes coming into the United States because curtailing Chinese imports would decrease the overall supply of such shoes.

Meanwhile, an agent for the China Ocean Shipping Co., also known as COSCO, China's only ocean steamship carrier, said, even though COSCO makes weekly calls at the Port of Long Beach, only one-third of its huge cargo comes from China.

"Politically and emotionally, COSCO officials are concerned" about China losing its MFN status, confirmed the agent, who didn't want to be named. "Business-wise, it would not be a devastating thing," he added.

He labeled the current grumblings in Congress to impose trade sanctions against China "offensive," citing the fact that the United States and China have done billions of dollars in business without incident.

Meanwhile, the threat to China's trading status is not causing any delays in plans to expand COSCO's terminal 40 acres by the end of 1994, said Hal Hilliard, marketing manager for the Port of Long Beach. He said COSCO has been calling on the port since the early 1980s.

Although most L.A. companies could easily recover from sanctions against China, many businesses are now finding a growing, lucrative niche for their products and services in the People's Republic. In fact, investing in China has become a favorite topic on Wall Street because many believe China's economic reforms are irreversible.

"In the long run, China can be a huge market for us in terms of commercial air transport," said Jack Kyser, chief economist for the L.A. County Economic Development Corp. He cited as an example McDonnell Douglas Corp.'s joint venture in Shanghai to produce planes.

Kyser added that environment-related goods and services, as well as American culture, also hold big export opportunities for L.A. companies trading with China.

China's growing trade with L.A.
Year       Trade volume(*)       Rank(**)
1991        $7.5 billion            4th
1990        $5.5 billion            4th
1989        $4.5 billion            4th
1988          $3 billion            8th
* Imports and exports combined
** Where China ranks in trade volume relative to L.A.'s other
foreign trade partners
Source: Los Angeles County Economic Development Corp.

Increasing China-trade opportunities for L.A. companies even more, Chinese officials announced earlier this month that they will reduce import tariffs on 3,371 items -- including crude oil, airplanes and computer software -- on Dec. 31.

China's decision to reduce those tariffs is apparently being motivated by its desire to gain membership in the General Agreement on Tariffs and Trade. Economists said China will have to reduce more tariffs if it wants to be part of GATT.